Homework 7:
Economic Analysis III, IV
Due noon Monday 10/26
CSCI 510, Fall 2020
30 points
The MedFRS project has selected Company L to develop, produce, and field test
the First Responder Workstations (FRWs), and train the first-responder personnel in
their use.
Company L has identified two candidate approaches for developing and
producing the FRWs. The Bold approach B will give them a profit of $600K if it
succeeds, but a loss of $100K if it fails. The Conservative Approach C will give them
a profit of $200K for sure.
1. (12 points). Construct the payoff matrix for the decision situation. Determine the
best decisions and payoffs under the Maximin rule, the Maximax rule, and the
Laplace rule. Determine the breakpoint probability of Bold approach success
above which the Bold approach will be preferable.
2. (12 points). Determine the Expected Value of Perfect Information (EVperfect
info); the payoff if Company L had perfect information about the success or failure
of the Bold approach, assuming that the original success or failure probabilities were
equally likely at 0.5 each. Determine the Expected Value of No Information (EVno
info); the payoff if Company L had no information about the success or failure of the
Bold approach, assuming that the original success or failure probabilities were
equally likely at 0.5 each. Determine the Expected Value of Acquiring Perfect
Information (EVPI): the maximum investment in acquiring information on the success
of the Bold approach that would be worth doing.
3. (6 points). Company L also identifies two levels of prototyping that would buy
information to reduce the risk of proceeding with no information. Prototype X would
cost $20K and reduce the risk of B failing from $100K to $50K. Prototype Y would cost
$40K and reduce the risk from $100K to $20K. Compute the Risk Reduction Leverage
(RRL) for Prototypes X and Y, and identify which is the better investment.
Grading Notes
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To earn points, must show the equations used and show your work in
obtaining the answers!
Be sure to specify the units of your values, where they apply (such
as, PM, $, K, etc.).
Remember to maintain 3+ significant digits throughout the
calculations and in the final answers to earn points.